ETHICS WORKSHOPS2014

1

Programme

• Introduction• IRBA update• Session 1: Discussion led by Uli Schäckermann• Tea• Session 2: Discussion led by Saadiya Adam• Session 3: Discussion led by Uli Schäckermann• Recap and Conclusion

2

Ethics – unravelling a registered auditor’s

responsibilities

IRBA Update:ROSC 2013IRBA StrategyMajor Audit DevelopmentsThe Audit Development Programme

3

Ethics – unravelling a registered auditor’s

responsibilities

IRBA Strategy

Transformation

Leadership in Africa

Independence Super - regulator

4

Major Audit Developments

Auditor reporting

• New ISA 701: Key audit matters – listed companies• ISA 700 series: Comment on management’s use of going concern,

comment on material inconsistencies with other information, opinion first and other re-ordering, likely December 2016 year-ends

Integrated reporting

• Publication of <IR> framework• Discussion paper on assurance• Adoption trends in South Africa and abroad

Pronounce-ments

• Attorneys Trust Account Audit Guide – issued March 2014• Medical Schemes Audit Guide – exposure draft to be issued Nov 2014• Reportable Irregularities Guide – exposure draft 2015

5

The Audit Development Programme 6

ADP

Who may offer Who may join Requirements

Effective: 1 January 2015

For question on the ADP contact

rzwane@irba.co.za

Session 1:The Fundamental Principles and Threats to ComplianceSafeguardsPurpose of SafeguardsIntegrity and Keeping a PromiseMarketing, communication and Social MediaIndependenceReasonable and Informed Third Party (RITP)

7

Ethics – unravelling a registered auditor’s

responsibilities

Fundamental Principles and Threats to Compliance

8

Safeguards

Threats to Complian

ce

IntegrityObjectivityProfessional Knowledge and due careConfidentialityProfessional Behaviour

Self Interest ThreatSelf Review ThreatAdvocacy ThreatFamiliarity ThreatIntimidation Threat

Paragraph 100.13-100.16

Safeguards by the profession, legislation/regulation:

1. Educational, training and experience required to enter profession

2. CPD3. Corporate governance, legislation and regulations4. Professional standards5. Professional monitoring and disciplinary procedures6. External review of work done by RA

Safeguards9

Steps to be takena. Identify the threatb. Evaluate significancec. Take qualitative and quantitative action

Objective must bed. Threats have been eliminatede. Threats have been reduced to an acceptable level (judgement)

Objective not achievedf. Declineg. Discontinueh. Resign

Purpose of Safeguards10

Ethics – unravelling a registered auditor’s

responsibilities

Integrity and Keeping a Promise

• The Code gives additional information:– be straightforward and honest – do not publish information that:

• is materially false or misleading;• is furnished recklessly; or• omits or obscures.

Some examples of where keeping promise is important:– "The audit will be completed by xxx”

– "The cost of the audit will be xxx”

– "Staff are our most important asset"

11

Marketing, Communication and Social Media

The profession makes full use of these types of media in promoting its services and informing clients and potential clients about their capabilities and offerings.

Rule 2.17 of the Rules Regarding Improper Conduct is of importance.

Paragraphs 250 of the Code of Conduct is relevant:

12

• Independence relates to assurance engagements• About ¾ of the code deals with independence arising

from various audit failures• Major concern for:

– The public

– The regulator

– Law makers – Companies Act Section 90(2)

• Independence is threatened when one or more of the five threats are identified

Independence (1)13

When does the RA need to assess independence?:

1. At client acceptance stage (ISQC1)

2. At planning stage

- Independence throughout the period covered by the AFS

3. During the audit

4. At the time of signing the report

Independence (2)14

What needs to be assessed?:

Personal relationshipsa. Engagement professionals

b. Partners

c. Firm and network firms

Business relationshipsd. Financial interest

e. Loans guarantees

f. Non-assurance services

Independence (3)15

Ethics – unravelling a registered auditor’s

responsibilities

Independence (4)Case Study: Family Relationships

Scenarios: Mr. Vega Snr is invited to become the group auditor.

– Mrs.Vega is an independent non-executive director of FHL, or

– Mr. Vega Jnr, son of Mr. Vega, is the Financial Director of Distributor, or

– Miss Vega, daughter of Mr. Vega, is in a relationship with the Production Director of Manufacturing, or

– A nephew of Mr. Vega is the Financial Director of FHL and Mr ABC , a close friend of Mr Vega Snr, is the Human Resources Director at FHL.

Can Mr. Vega be the group auditor in each of these scenarios?

Family Holdings Limited

Manufacturing (Pty) Ltd – 80% Distributor (Pty) Ltd – 35%

16

Independence (5)Case Study: Conflict of Interest

An auditing firm, Eagle Auditing (EA), has been engaged to audit the annual financial statements of Sun Power Limited (SPL), listed on the JSE. EA is located in Johannesburg and has associated offices in Durban and Cape Town, which are engaged in the audit of the subsidiaries of SPL in those locations. The audit is headed by a partner from the Johannesburg office.

• The Cape Town office has a direct shareholding in SPL (8%)• A director of the Durban office holds 100 shares in SPL

What threats arise? Are there any safeguards?

17

Using the Decision Making Matrix Attachment 2

Independence (6)Documentation Layout

See the attachment 3 in the slide pack

18

Ethics – unravelling a registered auditor’s

responsibilities

The Reasonable and Informed Third Party (RITP)

• The RITP is found in 13 places in the Code• Relates to decisions that have been made

– Conceptual Framework

– Independence

• Who is an RITP?• Use the above mentioned tools in your working papers.• How does that person make a decision? – think of EQRP.• “Weighing up all the specific facts and circumstances available to

the registered auditor at the time, would be likely to conclude that the threats would be eliminated or reduced to an acceptable level by the application of the safeguards” (200.10)

19

The RITP – a Case Study

Attachment 4 in the slide pack

During the course of an audit, the audit manager – not yet a registered auditor – began a personal relationship with the financial director of the audit client. The audit continued for another three weeks. One of the trainees on the audit team reported this to the engagement partner, as he was somewhat concerned.The partner listened to the trainee and asked some questions, then, having spoken to the audit manager, decided that the matter was not serious enough to receive further attention. The audit was already a bit late and budget overruns were likely.The audit was then completed and the audit report issued. About three months later an instance of fraud was discovered by the client that had resulted in revenue being significantly overstated. Further investigation revealed that the working papers underlying the audit of revenue did not indicate a problem with revenue recognition.The client was then informed about the relationship between the audit manager and the financial director. The engagement partner denied any responsibility as he had not been aware of any independence issue relating to this audit.

The RITP is called in. What would he do?

20

Session 2:Amendments to the IRBA CodeExpected DevelopmentThe Code and Legislation

21

Ethics – unravelling a registered auditor’s

responsibilities

Amendments to the IRBA Code

• Amendments to the Code became effective from 1 April 2014

• Response to changes in the IESBA Code

22

Ethics – unravelling a registered auditor’s

responsibilities

Alignment with ISAs Conflicts of InterestInadvertent violations

Breaches of a re-quirement of the Code

Amendments to the IRBA Code (2)

• Definition section – engagement team, those charged with governance

• Paragraph 100.10 – replacement, inadvertent violation

• Paragraphs 100.17-100.22 – renumbered 100.19-100.24

• Paragraphs 100.17-100.18 – inserted, conflicts of interest

• Paragraph 100.25 - inserted, those charged with governance

• Section 220 – conflicts of interest

• Paragraph 290.28 – those charged with governance

• Paragraphs 290.39-290.49 – inadvertent violations

• Paragraphs 290.117, 290.135, 280.159 – deleted

23

Expected Developments• IRBA Code1

• New IESBA Handbook2

• Long Association of Senior Personnel (Including Partner Rotation) with an Audit Client

• Structure of the Code – usability, applicability, enforcement. Culture not translation.

• Review of Part C of the Code.• Non-Assurance Services.• Responding to Non-Compliance with Laws and Regulations.

• 1http://www.irba.co.za/dmdocuments/Rules%20and%20IRBA%20Code%20(Revised%202014)%20Issued%2017%20March%202014.pdf

• 2www.ifac.org/publications-resources/2014-handbook-code-ethics-professional-accountants

24

The Code and Legislation (1)

Section 90 of the Companies Act, 2008

It is the law (Not a Code Issue)• Applicable to audit engagements of:

- Companies and CCs requiring an Audit in terms of the Act or

- An Audit voluntarily required by the MOI

IRBA have been monitoring compliance from 1 January 2014

25

The Code and Legislation (2)

• Section 92 of the Companies Act prohibits the individual auditor from serving as the auditor of a company for more than five consecutive financial years.

• Paragraph 290.151 of the IRBA Code states that an individual shall not be the key audit partner for more than seven years.

26

The Code and Legislation (3)

Effects of not complying with the Companies Act Companies Act• Contravention of an Act

• Contravention of the IRBA Rules Regarding Improper Conduct

– Rule no 2.2

• Contravention of the IRBA Code of Conduct

– Non compliance with the fundamental principles

27

Session 3:Firm and Network FirmsProfessional FeesAudit Fees and Independence

28

Ethics – unravelling a registered auditor’s

responsibilities

Firm and Network Firms (1)29

Definition of firm:

• A partnership, company or sole proprietor referred to in Section 38 of the Auditing Profession Act;

• An entity that controls the parties in (a), through ownership, management or other means; and

• An entity controlled by the parties in (a), through ownership, management or other means.

Definition of network:

• A larger structure:• That is aimed at co-operation; and• That is clearly aimed at profit or cost

sharing or shares common ownership, control or management, common quality control policies and procedures, common business strategy, the use of a common brand-name, or a significant part of professional resources.

Firm and Network Firms (2)

Network firm:Part of a larger structure that shares:

(a) a common brand name; or

(b) a common system of quality control; or

(c) significant professional resources; or

(d) profit and loss; or

(e) costs; or

(f) common ownership, control or management; or

(g) common business strategy

30

The consequence of being a network is that all firms in the network must be independent of audit clients of other firms within that network.

Firm and Network Firms (3) Case Study

Case study has been included in the pack. ( Attachment 5)

31

Ethics – unravelling a registered auditor’s

responsibilities

Firm and Network Firms (4)

• The decision of whether a network exists must be made by each firm. It is judgement-based and documentation is required regarding the decision taken.

• The decision will always be subject to review by a RITP.

• The consequence of being a network is that all firms in the network must be independent of audit clients of other firms within that network.

32

Professional Fees (1)Section 240

• Quote an appropriate fee – too low, too high• Identify the exact services• Make clients aware of the terms of engagement• Budget sufficient time and allocate appropriate staff• Contingent fees for non-assurance assignments create a

self-interest threat to objectivity:– What does the significance depend on?

– What are the available safeguards?

• Contingent fees for assurance services are prohibited under S240.4A

33

Professional Fees (2)Section 240

• Referral fees received from client• Referral fees paid by RA

– What fundamental principles can be affected?

– What threats can be identified?

– What safeguards can be recommended?

• Purchase of firm and payment made to heirs of the estate

34

Ethics – unravelling a registered auditor’s

responsibilities

Audit Fees and Independence (1)Case Study

Please see attachment 6 for case study

35

Ethics – unravelling a registered auditor’s

responsibilities

Audit Fees and Independence (2)290.217-290.224

Fees – relative size• The firm receives a large proportion of fees from a

single client.• Large portion of the revenue from a single partner or

an individual office.• Safeguards may include:

– Reduce dependency on that client– Review of work done– Quality review of the engagement

36

Audit Fees and Independence (3)290.217-290.224

Fees – relative size – PIEsFee exceeding more than 15% of total fees in 2 consecutive years (from the client and related entities):• Discuss with those charged with governance• Either use pre-issuance review or post issuance

review:– if significantly in excess of 15%, pre-issuance review

compulsory.

37

Audit Fees and Independence (4)290.217-290.224

Overdue fees• Self-interest threat to independence is created• Significant part of prior year fees must be paid before

the next audit report is issued, if not:– Evaluate threat and apply safeguards.

• If fees deemed to be a loan, consider reappointment

38

39

RECAP

Contact Details

IRBA Standards Department:

087 940 8800

standards@irba.co.za

www.irba.co.za

Mr. Uli Schäckermann:

082 554 1243

consultus@schackermann.eu

40

Ethics – unravelling a registered auditor’s

responsibilities